Thanks to Senator Kim Carr’s Innovation Review chaired by Terry Cutler, innovation is a hotly debated topic at the moment ... The review received an overwhelming number of submissions, over 630. To put in perspective that was more than the Garnaut Submission, with people suggesting wide ranging solutions for making Australia more innovative.

You can go on the web and read most of them but one part of the site in particular makes good reading, and that’s the cartoon area cartoon area …..some cartoonists have come up with some great cartoons to illustrate issues around innovation.

A lot of the submissions were around increasing R&D spend – which is important – but research and invention are just enablers of innovation – they do not necessarily result in innovation itself.

IBM understands the importance of raw invention – in fact, we spend more on research and generate more patents than any other IT company in the world – but we know that today, invention is just one ingredient of innovation. In the 19th Century: The steam engine… powered the industrial revolution In the 20th Century - The transistor… made the microchip possible, and plastic… revolutionised the packaging industry

But, in the 21st Century, although invention remains important, it’s not enough. It’s only at the intersection of invention, discovery, skills and business models that you find innovation.

For example, IBM India recently developed an innovative interviewing technique by combining the discipline of HR with an internet platform and voice recognition technology.

In India, IBM hires 50 people every day of the week. Six years ago we had 5,000 IBM employees in India, today we have 70,000.

As you can imagine, processing that number of hires stretched our HR team to the limit – we didn’t have enough people to interview, process and test all the applicants.

And so today, first stage interviewing in India is automated. A voice activated system tests the applicant’s command of English and their accent. Those that pass, go through to second round interviews with a human being. The system isolates about 100 out of every 300 applicants – saving untold time in face-to-face interviews.

So, that’s our definition of innovation for this morning: the inspired application of intersecting disciplines to create new value.

But what about ‘sustainability’. Well in 2008 sustainability has two distinct objectives

1) Sustaining a company and Australia’s future economic prosperity... and 2) Sustaining the planet

This morning, I’m going to look at how innovation can support both of these objectives – starting with the massive shifts in Australia’s business environment.

Today, for the first time in human history, everything is connected. The internet of people is one billion strong. But the internet of things with embedded intelligence is headed towards a trillion.

What we’re seeing is the emergence of the Internet as platform — Web 2.0 — in which all manner of business services and applications are developed for and delivered via the web.

This alone will enable all manner of innovation – creating whole new industries.

But it also means that, when everything’s connected, work flows… the work that people do, the ideas that people have, and even the work of computers. It flows to the places where it is done best – that is, most efficiently and with the highest quality. It’s like water finding its own level.

Taking software development as an example, between 2005 and 2010, China and India’s developer pool will expand by 3-fold.

So by 2010, India will have 2.4 million developers at an hourly wage of around US$6.48 – still the world’s lowest price point for this increasingly scarce skill – so we know where software development is likely to flow.

And this isn’t just about software developers.

Right now, Australia produces about 5,000 engineers every year, the US produces 70,000. But how many do you think China and India produce?

Lets do an exercise…….I am going to ask everyone to raise your hands….then I am going to call out numbers of Engineers that India and China produce each year and when I get to the number you think is right put your hand down

The point is, any company – large or small – based anywhere in the world – now has access to these high value, competitive skills

Which means two things:

First the economics of virtually every industry are being redefined – skills because everyone(not just large organisations) now has access to expertise and capability at radically reduced price points.

Second, organisations are reshaping their operations to take advantage of economies of expertise...

For example: US radiologists now send their x-rays to Australia Asian clothing manufacturers outsource design to Italy Global investment banks do their derivative processing in Dublin And in the US… McDonald’s drive-through orders are routed through the Philippines!

And as this global platform for work has been built out, it’s had a dramatic impact on global markets and societies.

In 2008, the world’s growth markets are no longer as dependent on the exchange of raw materials for industrial goods. Instead, they are innovating.

Most importantly, their people are becoming consumers; they are joining the middle class. Hundreds of millions of people are opening their first bank accounts, getting their first cell phones, using their first credit cards. Tens of millions are buying their first cars.

It’s easy to imagine this has major implications for manufacturing – and to an extent it does. But it has far more radical implications for two other industry sectors.

The first, of course, is resources – resources to build the infrastructure to support these high growth economies. But the second is services. Because, when people buy a mobile phone or open a bank account – they are suddenly, many of them for the first time, in the market for services.

Currently, in OECD countries more than 70% of all jobs are in services. There are now more services companies in the Fortune 500 than manufacturers. And services will account for the majority of the next on hundred million jobs created in the coming decade...

Like our OECD peers, Australia has also transitioned from a manufacturing to a services economy. Over the past two decades you can see from this chart.. the services sector has underpinned Australia’s economic growth and prosperity.

In 2007, services accounted for more than 75% of economic activity, around 85% of employment, and more than 20% of exports.

And IBM has been part of this change.

In the 1990s, when we employed 2,000 people, we used to manufacture PCs… Today, with seven times that head count, we have no local manufacturing, and instead deliver services to our clients and the globally integrated IBM organisation.

So hold that thought: the Services sector is fuelling our economy…

There is a major factor standing in the way of our continued growth... as we can see on this chart.

Australia’s unemployment rate .…has been in steady, consistent decline. Today, unemployment is at 4.3% - a 34 year low leading to a very tight labour market

This next chart on shows population growth rate in Australia and Japan Ours is the green line – the white one is Japan...

In Japan, the population will actually start to shrink in coming years….and, as you can see here, we are heading in the same direction. In our lifetimes, population growth will be near zero. Add into this mix the fact we are also aging as a population…. And you end up with a chronic shortage of skilled labour…By 2020, Australia will have a labour shortage of half a million people.

So, now we have our economies being fuelled by growth in the Services Sector that is typically labour intensive…and we are running out of people to do the work. And not only is this a major barrier to growth….this is a major barrier to innovation. So what is the answer? The answer lies in: using technology to create new ways of doing business; and transforming our business models to take advantage of global expertise. And Australia is already moving in that direction. Australian businesses are spending more on IT than anywhere in the world. Australia is spending 5.7% of GDP on IT, significantly more than the US, UK, China or India. And many of IBM’s local clients are embracing global resourcing.

BUT ..Global sourcing isn’t just cost-effective, it helps organisations to harness innovation – allowing us to take advantage of ‘economies of expertise’

This is why IBM now has a globally integrated business model... we’ve done at the enterprise level, what many organisations do at the product level.

Take the new Boeing 787: its wings were built in Italy, its fuselage in Japan and its titanium parts were designed by a team in Russia...

Now convert that idea to the enterprise level and you get the same cost and quality advantages – right across your balance sheet...

What does that look like?

Well, we believe in eating our own cooking…right now, for any IBM company, anywhere in the world, back office services come from a single centre of competency.

It doesn’t matter which IBM country you work in: procurement comes from Shenzhen, Human Resources from Manilla, Accounts Payable from Shanghai...

Similarly, we now have one integrated supply chain around the world supporting our business in 174 countries

The benefits to our global organisation have been startling.

Simply implementing a single supply chain allowed us to reduce costs by over $6 billion per annum. The project also led to a 25% sales productivity gain.

Of course, IBM isn’t the only company changing its business model to drive innovation.

This year, 1,100 CEOs from around the world told us how they are adapting their business models Two thirds are implementing extensive innovations More than 40% are changing their enterprise models to be more collaborative And many are planning radical changes in business design to capitalise on global integration.

So, to become more innovative, Australia needs to adopt new business models that allow us to tap into global skills – but we also need to look at our own education systems to make sure they produce graduates with the right mix of skills and critical thinking needed for innovation.

Because Australia doesn’t just have a shortage of people – we also have a shortage of skills.

The problem is the education systems that served our manufacturing economy produced people with deep knowledge in a single discipline. What is commonly called ‘I’ shaped people.

But services cut across multiple disciplines. We need ‘T’ shaped people, whose expertise spans a number of skills.

At IBM – we used to hire lots of people to cut code – a single discipline. But today we need people who can solve our clients’ complex business problems.

Imagine, for example, the skills required to detect credit card fraud. That solution needs a combination of maths, law, finance, technology, psychology and political science.

When IBM hires a traditional IT graduate it often takes 6-9 months before that person becomes productive.

I’m sure your businesses have the same issues.

What we need is multi-discipline graduates, trained in problem solving, teaming and critical thinking – because these are the skills that drive innovation and support a services economy.

This is why IBM is collaborating with Australian universities to create a new academic discipline – the discipline of Services Management.

Its goal is to create multidisciplinary thinkers and managers with the skills needed to succeed in an innovative, services-led economy.

IBM is supporting that process by providing pre-built lecture content, notes, reading materials and guest lecturers. And the results have been amazing.

While the universities are delighted with the program, the biggest response has been from the students. The courses are massively over-subscribed and attendance is strong and enthusiastic. You may not be aware, but these days students usually avoid lecture halls – they do their learning online. But not on this course – the classrooms are packed, with 100% turnout.

Professor Andrea Stern, who runs the course at Sydney Uni, tells us she has to throw the students out at the end of the day.

Going forward, we believe that, as innovation increasingly requires collaboration across multiple disciplines, specialties and borders, these people will be the innovation leaders of our future.

And we need more of them. To date, IBM has been the sole advocate of services management in Australia. We’d welcome other businesses to join us in collaborating with academia to shape the graduate skills of the future.

So, we need to adopt new business models to tap into global skills – and address our own local skills pipeline. But what else can Australia do to foster innovation?

To help answer that question, IBM joined forces with the Melbourne Insititute, and began looking at how different Australian industries approach innovation.

For several years now, we’ ve been looking at R&D, patents and designs, and also at organizational and managerial innovation, which includes changes to business models, and the way good and services are taken to market

In our latest report, which is available online, we’ve found that after a prolonged period of growth, innovation activity in Australia has tapered off since 2004.

Organisational and managerial innovation in particular is performing badly, falling by two per cent in 2006.

Put simply, Australian businesses need to do things differently, to look at new partnerships, routes to market, and new ways of creating value. As with the theme of this conference, Connecting for Success, businesses need to connect and collaborate to foster innovation..

Collaboration is especially necessary for small businesses, which contribute 98% of our national GDP. Because without the R&D capability, or IP expertise of their larger counterparts, they often struggle to innovate.

Although smaller organisations are nimble and prepared to take risks, they need a more collaborative approach to innovation.

Building collaborative relationships with key external partners and providers will help smaller organisations to punch above their weight.

For example, by partnering with organisations with established expertise in particular systems and processes, smaller organisations can leapfrog larger competitors burdened by legacy systems and entrenched ways of running their operations.

Another area that needs additional support to drive innovation is the public sector. The Innovation Index found productivity in health and community services has underperformed the national average since 1990. The sector has also had lower growth rates in R&D, patent and design intensities compared with other industries.

And while, as we know, technology solutions abound that are ready to transform health care in Australia – transforming an industry requires collaboration.

Shared responsibilities across healthcare providers, payers, the layers of government, clinicians, and patients will be essential if technology-driven innovation is to flourish across the sector.

We also need to use technology-driven innovation to support our second area of sustainability I mentioned earlier: the planet.

Since the Federal Government’s Green Paper put flesh on the bones of the Australian Emissions Trading Scheme, carbon has become a new item on the Board room agenda.

Some organisations will be caught in the mandatory reporting requirements of the National Greenhouse and Energy Reporting Act...

Now something you may not know…the IT industry is responsible for around two percent of global CO2 emissions. To put that into perspective, that’s the equivalent of the aviation industry.

While technology is a source of CO2 emissions, it is also part of the solution to help organisations identify and manage their environmental footprint.

As the cost of carbon rises, it will become both an asset and a liability, and every organisation will have a clear bottom and top lines incentives to track and reduce their carbon footprint at every stage of the supply chain.

And this means, even if you don’t emit at the thresholds that will require carbon reporting – you are likely to be in the supply chain of a company that is.

And, with many companies announcing their intention to report voluntarily or go ‘carbon neutral’ – to build their brand and gain first-mover advantage in their market – it’s hard to imagine a company that won’t be under pressure in some way from the emerging carbon market...

And that includes small and medium sized business... or SMBs It’s interesting to see what Australia’s SMBs are doing when it comes to tackling environmental issues.

In a global IBM survey conducted last year, Australian SMBs were leading the world in terms of having an environmental policy – 55% against an international average of 44%.

However, not all those environmental policies are translating into action. The survey found, 57% of Australian SMBs surveyed hadn’t made any changes in their business operations to reduce energy costs in 2007 – nor did they have plans to in 2008.

In effect, only 33% of Australian SMBs interviewed have made or plan to make changes to reduce energy costs, compared to 47% internationally.

So, some Australian business have yet to even plan for reducing energy costs...

And the thing is, reducing energy costs is just the tip of the iceberg when it comes to adapting to a carbon-constrained future ...

Energy management can have a far greater impact on your business... when you look at it from a top line perspective...

You can leverage energy management simply to gain advantage in your existing markets – a point that has not been lost on MyRate – the carbon neutral home loan – the Agincourt Hotel (George St, Sydney) – Australia’s first carbon neutral pub! – and the Vatican the world’s first carbon neutral state.

These might sound more packaging than real substance , but the real value will come from looking at new markets – some that we can already see emerging, for example – property trusts managing sustainable buildings – others we have yet to imagine.

Which is why IBM has just announced ‘Big Green’... a billion dollars every year to accelerate green technologies and services...

The new market in a carbon constrained environment is in giving clients a road map, tools and systems to help them address the IT energy crisis.

The problem we are all facing is that Moore’s law doesn’t just apply to the processing power of chips... it also applies to the amount of energy technology uses. Couple that trend with the news of the emerging carbon market and we have a problem – a big one!

At the moment, energy use accounts for about 10% of your IT budget. But what would happen if that went up to 50% - which Gartner says is perfectly possible... Try getting that budget increase through the board!

So what’s the answer? The answer is to minimise our carbon footprint by using:

systems that monitor and control carbon emissions;

power efficient products and systems that can operate within capped power and thermal limits;

technologies like workload balancing and virtualisation to balance demand for computer power against escalating energy prices; and

environmentally safe disposal to minimise your carbon liabilities.

Using approaches like this, IBM is confident we can double our own computing capacity by 2010 without increasing power consumption or carbon footprint .

This will save 5 billion kilowatt hours per year . . . as much energy as is consumed by Paris every year? - “the City of Lights”.. and we know other organizations can get the same result.